June 18, 2019 / 1:09 AM / 4 months ago

Pound at five-and-a-half-month low as Johnson leads, Aussie vulnerable

TOKYO (Reuters) - The British pound on Tuesday languished near this year’s low on rising worries Boris Johnson, the front-runner to replace UK Prime Minister Theresa May, could put Britain on a path towards a dreaded no-deal Brexit.

FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

The Australian dollar is also at its lowest levels since the flash crash of early January, hit by growing expectations of another rate cut by the country’s central bank and by the spectre of a further slowdown in China - Australia’s largest export market.

The yen and the euro were steadier, with investors holding out for trading clues from policy-setting meetings by the U.S. Federal Reserve and the Bank of Japan as well as a conference organised by the European Central Bank, all scheduled this week.

“While major currencies were little moved now, when you look at market moves over the past week or so, many commodity currencies and emerging market currencies are weak, reflecting broad risk-off sentiment,” said Masashi Hashimoto, senior analyst at MUFG Bank.

The U.S-China trade frictions and rising geopolitical tensions in the Strait of Hormuz after recent attacks on tankers are all undermining risk sentiment, he said.

Worries about Brexit hit the British pound, which tumbled to a 5-1/2-month low of $1.2532 on Monday and last traded at $1.2539.

Sterling also fell to its weakest level since January against the euro, which climbed to 89.50 pence, compared to a two-year low of 84.56 touched just over a month ago.

Former foreign minister Boris Johnson got a boost on Monday in his campaign to succeed May as one of his former rivals and EU supporter Matt Hancock backed him.

That rattled markets as Johnson, the face of the official campaign to leave the European Union in the 2016 referendum, has promised to lead the United Kingdom out of the EU with or without a deal.

The pound could be in for a rough ride in coming days, with a raft of potentially market-moving events ahead, including consumer inflation and retail sales data, due on Wednesday and Thursday respectively, and the Bank of England’s policy announcement on Thursday.

The risk-sensitive Australian dollar drooped at $0.6855, just above its 5-1/2-month low of $0.6849 hit overnight, as trade tensions between the United States and China have shown few sign of abating.

Markets are pricing in about 50% chance of another rate cut next month by the Reserve Bank of Australia, which delivered its first easing in almost three years just two weeks ago.

The euro hardly budged at $1.1220 while the dollar was little moved at 108.53 yen.

The dollar was slightly undermined by the New York Fed’s business index showing a record fall this month to its weakest level in more than 2-1/2 years.

The Fed’s two-day policy meeting starting later on Tuesday is the next major focus after markets have priced in more than two 25 basis-point rate cuts by year-end.

That marks a sharp contrast to the Fed’s official forecast in March, which showed policymakers deemed the next move would be a hike.

“As markets are now pricing in rate cuts in the second half of this year, the question is how the Fed will respond to such an outlook,” said Shinichiro Kadota, senior strategist at Barclays.

Editing by Shri Navaratnam

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